Turmoil After US Debt Downgrade

PARIS -- Economic thermometers or bellows, whose pronouncements about the creditworthiness of countries are fanning the flames of the debt crises in Europe and the United States?

The question is about ratings agencies, who are back in the doghouse following the announcement Friday by Standard & Poor's, the most influential of the troika of agencies that grade countries and companies in terms of their ability to repay their debt, that it was downgrading the United States a notch, from AAA to AA+.

S&P explained its decision to downgrade long-term U.S. debt for the first time since 1941 on the grounds that the plan agreed last week by the U.S. Congress to cut its public deficit by nearly $1 trillion over the next 10 years fell short of what was needed.

Coming in the midst of the worst turmoil stock market since the financial meltdown of 2008, the move -- which competitors Moody's and Fitch refused to follow -- caused consternation.

By downgrading the U.S., long seen as a safe haven, S&P risked causing a sell-off of U.S. debt that would shove up its borrowing costs, making it more difficult for it to meet its repayments -- in turn making things worse, experts warned.

With markets already in a tailspin over the spiraling borrowing costs of Italy and Spain, psychosis set in.

"Ratings downgrade: who's next among the AAA?" France's left-leaning Liberation daily wondered on Monday, noting that France -- which is rated AAA -- was also heavily indebted.

The move also led to fresh questions about the role and responsibilities of ratings agencies.

For Liberation, S&P's decision on the U.S. showed that that the agencies now wield a level of power that is "infinitely greater than political power."

"By managing the complex chain that allows states to obtain money, ratings agencies have nothing less than the power over life and death," the paper's editorial intoned dramatically.

The head of S&P in France, Carol Sirou, denied ratings agencies had become all-powerful.

"The role attributed to us is far superior than it really is," she defended, assuring that "nothing would be worse than saying nothing".

And yet, nothing was exactly what the agencies said in the run-up to the sub-prime mortgage crisis in the 2008.

S&P, Moody's and Fitch gave toxic mortgage bonds AAA ratings, denting their credibility and raising questions about their independence.

The U.S.-based agencies were also lambasted for having givenU.S. energy company Enron top marks right up until it collapsed.

"Why do we trust these discredit agencies of doom," Britain's Daily Mail wondered.

"Having Standard & Poor's downgrade the creditworthiness of the United States, and warn it about further downgrades, is a little like having the Catholic Church lecture scout leaders on the proper behaviour towards boys," Time magazine columnist Bill Saporito wrote scathingly.

"We were heavily blamed for not having warned of the risks," Sirou told Liberation. "Now, people say we warn too much."

The AA+ rating of the U.S. was still equivalent to a 19/20, an excellent grade, she pointed out.

But the agencies looked unlikely to emerge unscathed from the latest crisis.

In July, the European Union's top official for market regulation, Michel Barnier, had reacted angrily to the downgrading by Moody's of Portugal's debt to "junk" status -- a move likened to economic "terrorism" in Lisbon -- saying countries on bailout programs should be spared ratings changes.

He also he would push for tighter regulation of ratings agencies at the Group of 20 level.

Meanwhile, there is a growing clamour for a European-based agency.

German Chancellor Angela Merkel and Luxembourg's Prime Minister Jean- Claude Juncker are among those who have spoken in favour.